To The Moon

$Applied Materials(AMAT)$

Introduction & Stock Overview

Today, we're going to take a look at Applied Materials (ticker: AMAT). This stock was requested in the comments of one of my previous videos. The last time I covered AMAT was back in January 2024, and since then, there have been some notable changes. So, I thought it was worth revisiting in a new video.

As always, this is not individual investing advice—just my approach to analyzing stocks. AMAT is a cyclical stock, and it's been a while since we've covered one of these, so this should be interesting.

Analyzing Historical Earnings

Looking at historical earnings, we see that during the 2008–2009 financial crisis, AMAT’s earnings turned negative—falling by more than 100%. However, they rebounded within two years, demonstrating the cyclical nature of the business. These types of stocks can create great investment opportunities when their prices drop significantly.

Stock Price Declines & Recovery Potential

For example, during that period, AMAT’s stock price fell roughly 68% from peak to trough. As a rule of thumb, I prefer cyclical stocks to decline at least 50%, as that gives me the potential for a 100% return if the stock price fully recovers. My approach doesn’t rely on earnings for valuation; rather, I focus on identifying cyclical patterns and ensuring a history of recovery and long-term growth.

Applied Materials operates in the semiconductor materials space, so cyclicality is expected. However, they are also in a long-term secular growth phase, which helped them remain more stable during the 2019 market downturn—though that wasn’t a full recession. Still, the market treated it as such, and the stock price declined 55%, even though earnings remained relatively steady.

Criteria for High-Quality Cyclical Stocks

A key factor I look for in cyclical stocks is an upward trend over time—higher peaks in each cycle and shallower declines during downturns. AMAT meets these criteria, making it a high-quality cyclical investment. If the stock price falls deeply enough, it can present an opportunity for significant gains. My target is a 100% return, meaning I aim to buy when the price has dropped by at least 50% from its previous peak.

For example, if a stock peaks at $100 and falls to $50, a recovery to $100 results in a 100% return. I also want to see a history of these recoveries happening within five years. AMAT has demonstrated this in past cycles, making it a strong candidate for this strategy. Even if recovery takes longer—say, five years—the potential annualized return is still around 15%, which is solid.

Risks of Cyclical Stocks

That said, cyclical stocks come with higher risks. Their earnings fluctuate due to significant capital investments and fixed costs, which means that when demand falls, earnings can drop sharply. The market often overreacts to these downturns, punishing the stock price more than necessary—especially for high-quality companies. However, these stocks are riskier by nature, and not all of them recover as expected. I estimate that around one in five fails to rebound as anticipated.

Mitigating Risks & Maximizing Returns

To mitigate this risk, I look for stocks with deep enough declines to justify the potential rewards. For instance, during the 2001 recession, AMAT’s stock fell 80% due to the dot-com bust. In 2008, despite it not being a tech-specific downturn, the stock still declined 68%.

The key takeaway is that cyclical investing is a balance. Being too conservative means missing opportunities, while taking too much risk can lead to poor returns. By analyzing historical downturns, we can develop a strategy that maximizes upside potential while managing risk.

We saw that earnings went completely negative in past downturns, but the 2020 decline wasn’t a real recession. Semiconductor stocks didn’t drop as much as they typically would, yet AMAT still fell about 50%. Then, in 2022, as I just showed, the stock dropped 55%.

Adjusting the Buy Strategy

With that in mind, the goal is to develop a strategy that ensures we buy at deep enough declines while also giving ourselves opportunities to capitalize on rebounds. In my last video, I had stricter parameters, aiming to buy only after a 65% decline from the stock’s peak. Since then, AMAT hit a new high of $255.89, meaning my original buy target was 65% below that.

However, I’ve since adjusted my approach. Instead of taking 1% weighted positions, I’m now taking 0.5% weighted positions. This gives me more flexibility and allows me to start building positions earlier. In 2022, for example, AMAT came close to my buy target but didn’t quite hit it. As a result, I missed out, whereas I was able to buy other semiconductor stocks that did meet my criteria. If I had started layering in at a 50% decline instead of waiting for 65%, I could have captured some of the upside while still maintaining my long-term strategy.

Missed Opportunities & Lessons Learned

For instance, if I had bought AMAT at around $90—down 50% from its high—I could have doubled my investment within a year. Even with a half-weighted position, that would still have been a strong return. I followed this approach with Micron and AMD, but I missed AMAT because I expected a deeper market downturn. However, government intervention softened the impact, and the AI boom fueled a quicker recovery.

New Strategy: Layering in at 50% Declines

Going forward, my strategy is to start buying after a 50% decline. This would have allowed me to enter AMAT’s 2021 and 2022 downturns with at least a half position, capturing 100% gains on those rebounds. These would have been solid returns, and applying this approach across multiple stocks increases the overall benefit.

Of course, just because past declines didn’t fully materialize doesn’t mean the next one won’t. The current valuation is high, with a PE ratio of 28 at its recent peak. That’s even higher than the 2018 peak, which had a PE of 15 before its 50% decline. Historically, when we see a real down cycle or recession, semiconductor stocks tend to fall sharply.

Balancing Risk & Reward

By layering in at a 50% decline, I reduce my risk while still positioning myself for strong returns. If the stock drops 65%, I can add another position, and if it falls as much as 75%, I may buy even more—depending on available capital. Averaging across these levels results in a solid return profile, similar to what I would have achieved if I had just waited for a strict 65% decline.

Potential Returns Over Time

Looking back, if I had used this strategy earlier, I could have captured three separate doubles in the past eight years, even with smaller positions. These add up over time, especially when applied across multiple stocks. More importantly, this approach protects against major downturns by ensuring I don’t go all-in too early.

Current Buy Level for AMAT

For AMAT, my first buy level is set at $127.95, representing a 17.62% further decline from current levels. This will be a 0.5% portfolio position, with additional buys if the stock falls further. The goal is to hold until the stock makes a new high, ideally within five years. While a quicker recovery is always preferable, we need to be prepared for a longer timeline, especially following a major market boom.

I don’t have 2001 data included here, but that was a particularly tough recovery—many stocks from the dot-com bust didn’t fully rebound before the Great Recession hit. However, I believe the semiconductor industry is in a stronger position today, despite the high valuations.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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